Foreclosure: Deed in lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt. 

     Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters: 

     1. Value of the property vs. the amount of the debt. 

     2. Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens. 

Real Estate: Common Area Parking Spaces Must be Assigned Equally

   The Court of Appeals of Virginia recently issued an opinion affirming a Circuit Court decision holding that common area parking spaces must be assigned equally. The case involved a suit by a homeowner, Patrick Batt, against Manchester Oaks subdivision in Fairfax County. The subdivision contained 57 townhouses, 30 of which were constructed with a garage and driveway (garaged lots) and 27 of which were constructed with an additional bedroom and bathroom in lieu of a garage (ungaraged lots). The subdivision included a common area with 72 parking spaces. 

     The subdivision was subject to a declaration, administered by the homeowners association that gave the association the right to designate a maximum of two parking spaces for the exclusive use of each lot owner. However, the association was not required to ensure that parking spaces were available to any particular owner or to oversee use of the parking spaces. Batt had purchased a garaged lot in 1990, before the subdivision was complete. At that time, residents parked wherever they chose. In 1993 or 1994, the developer began assigning two parking spaces to each ungaraged lot. The remaining 18 parking spaces were designated as “visitor” parking, available to all lot owners on a first-come, first-served basis. 

     In 2009, the association issued one visitor parking permit to each lot owner and posted a parking policy on its website. Any vehicle not displaying a permit while parked in the visitor parking spaces would be towed. In December 2009, the association amended the declaration to provide that the association had the right to designate two parking spaces exclusively to each of the ungaraged lot owners on a non-uniform and preferential basis. In June 2010, Batt sued the association, claiming that the unequal treatment of owners over parking space assignments violated the declaration. The association argued that Batt’s suit was barred by the December 2009 amendment to the declaration. 

     The circuit court ruled in Batt’s favor, finding that the amendment was invalid for six reasons. The association appealed. The Court of Appeals ruled, in summary, that equality is inherent in the definition of “common area.” A “common area” is defined as, “[a]n area owned and used in common by residents of a condominium, subdivision, or planned-unit development.” Black’s Law Dictionary defines “in common” to mean “[s]hared equally with others, undivided into separately owned parts.” Accordingly, the court held that the association must assign common area parking spaces to all lot owners equally, if at all, unless the declaration expressly provided otherwise. In this case, the court did not find that unequal assignment was authorized. 

     Call Eddie to discuss your Homeowner’s Association questions. (804) 545-6251. 

Bankruptcy: Punitive Damages - Failure to Return Vehicle

     Judge Tice of the United States Bankruptcy Court, in Richmond, in the case of Brown v. Town & Country Sales and Service, Inc., ruled that a creditor that repeatedly refused to give the debtors’ pickup truck back to the debtors, despite the debtors’ entitlement to the truck after they filed for bankruptcy, violated the automatic stay in bankruptcy and must pay debtors’ attorney’s fees and punitive damages. 

     The creditor’s registered agent testified at trial that, despite the fact that they had always returned repossessed property post-petition in the past, the creditor elected not to return debtors’ vehicle. Instead, she testified that this time the creditor decided it would not return debtors’ vehicle upon demand because the creditor was unhappy that a large number of its customers had declared bankruptcy in the past year. 

     The debtors provided the lender with proof of adequate insurance. The debtors were currently awaiting confirmation of their modified Chapter 13 plan in which the debtors proposed to pay the lender in full. The debtors owed the lender $1,689.02 for the initial truck loan, as well as $1,764.95 for the replacement motor, for a total of $3,453.97. 

     The Court concluded that the creditor’s demand for full payment, coupled with its inaction and retention of the vehicle, amount to an exercise of control sufficient to find a violation of the automatic stay for failure to turn over the vehicle pursuant to Bankruptcy Code §542(a). The Bankruptcy Court ruled that the debtors were entitled to recover the truck upon filing bankruptcy. Thus, the creditor’s retention of the vehicle post-petition constituted an exercise of control in violation of the automatic stay and Bankruptcy Code §362(h), which permits a court to impose attorney’s fees, costs and punitive damages for a willful violation of the automatic stay. The Court awarded these. 

   The Bankruptcy Court further awarded punitive damages against the creditor in the form of cancellation of both of the creditor’s security interests against debtors’ vehicle. Any balance which debtors owed the creditor was treated as an unsecured claim. 

   The lesson in Brown - know the rules and always consult experienced counsel.

Collections: Bank Denied Lawyer Fees Due to Problem in the Guaranty

    In the case of Jefferson National Bank v. Estate of Frogale, a Loudoun County Circuit Court Judge denied the award of attorney's fees to a bank because the guaranty agreement did not have a provision for attorney's fees even though the promissory note clearly provided for 25% attorney's fees. The Loudoun Court found that the guaranty referred only to collection of "charges or costs" upon default. The Court ruled that this language was ambiguous, and as such, construed the ambiguity against the bank because they drafted the documents. 

     In Frogale a corporation defaulted in the payment of a note and the bank sued the note's guarantor. The guarantor filed a motion for summary judgment regarding the question of the guarantor's liability for attorney's fees. The Loudoun Court reviewed the Virginia Supreme Court case of Mahoney v. Nationsbank. In Mahoney the Virginia Supreme Court ruled that a note and guaranty are two separate agreements, but each must be construed in the light of the other. In doing so, the Loudoun Court stated that it was "crucial that the bank chose to distinguish in the Note between 'all other applicable fees, costs and charges' and attorney's fees; and that it chose not to place a specific attorney fee obligation in the guaranty." The Loudoun Court pointed out that the bank could have placed an attorney's fee provision in the guaranty just as it had done in the note. 

     The lesson of Frogale is that you should be careful that when you have guaranties you ensure that the language in the guaranty "mirrors" the language in the promissory note - without mirror language, there can be a problem, with mirror language, ambiguity should not be an issue.

Foreclosure: Right to Cure a Default

     Question: Once a borrower is in default, can he “reinstate the loan”, or, “cure the default” and stop the foreclosure sale? Answer: yes. In general, most deeds of trust contain language that allows a borrower the opportunity to reinstate, or cure, the loan after the due date set out in the note. If the deed of trust contains this language, the note cannot be placed into default and accelerated until the cure period has expired. Government loans such as Fannie Mae and Freddie Mac have very specific requirements. In fact, a borrower can always cure a monetary default and stop a foreclosure up to the time of sale by paying in full, in good funds, the deficient amount, including all costs of the sale.